Crisis is here, reforms must be too

Originally appeared on The Morning

By Dhananath Fernando

Providing a definition for an economic crisis is a difficult task. Especially for a country like ours, which has had an ever present economic crisis, since independence. Realising the depth of the crisis is too difficult when we don’t know the real potential outside. This is because we have normalised our economic difficulties. As a result a transition from one phase of the crisis to another phase is celebrated as a victory. In certain instances due to lack of understanding, deepening the economic crisis too has been celebrated as a move towards economic prosperity without realisation of the reality. 

Our comparison has always been “how we did in the past” or “how the previous governments had done it”. As a result we have become accustomed to having very low levels of expectations. This is also a result of  a lack of exposure to where we really want to be and without realising our potential. 

The current economic crisis is just a good reflection of where we all stand including our policy-makers. Many of us consider that having adequate USD (foreign currency) to settle our foreign debts is the point of getting over the line from our economic hardships. Basically, the ability to pay debts is perceived as prosperity.  As a result we have added enormous pressure on all our businesses to celebrate a fake victory. At this backdrop we keep implementing the wrong policies, such as import restrictions without realising that we are deepening our economic crisis by adding extra burden on their raw material importation. We have reached a stage where we look for credit lines to secure our fuel imports mainly from Oman, India, and the Middle East. 

At the rate crude oil prices are increasing, without a significant reduction in consumption, credit lines will increase the amount of bi-lateral debt. It is also most likely that our bi-lateral partners would ask for a condition to join an IMF programme, if they are to lend to us in the future. This is because the individual countries who we borrow money from, need an assurance of our solvency. On the flip side, our bilateral partners too need to take precautionary measures to minimise the risk of lending to us, or else it would cause political unrest in their respective countries. There will be questions raised as to why a bi-lateral loan was provided to a country with a low credit rating. Some of Sri Lanka’s potential borrowers are beneficiaries of different forms of IMF assistance. The recent Bangladesh swap facility is a good example. Bangladesh received a $ 732 million disbursement from the IMF to address the Covid-19 pandemic, following which they have agreed to provide us with a $ 250 million swap facility in tranches. 

Adding fuel to fire is the lack of reforms. The failure to do so is like not using the tools in our tool box. So, existing hardships will prevail or worsen, and complaints on delays on clearing shipments haven’t been addressed as yet and the USD shortages still continue at banks. Further, the lack of decisive action being taken is risking the stability of our banking sector. As a result we have downscaled our capacity and expectations to a greater extent and everyone has gone to a survival mode and comparing an era of survival with another era of survival while the human race and societies have taken great strides on developing the entire society as a whole. 

The current control of the USD has now started to affect our remittances. Our remittances are declining significantly even with the nature of the pandemic we had earlier. Increasing remittances was a key goal of our policy-makers. In fact remittances were encouraged by agreeing to offer a slightly higher exchange rate for remittances to cover up the loss of revenue from tourism. It is not rocket science to figure out why our remittances are in decline, when the kerb market offers a rate about 20-30% higher than the rate fixed by the Central Bank of Sri Lanka. At the same time, when imports are restricted people are motivated to get goods directly, at a reasonable price from overseas travellers, instead of transferring foreign currency to Sri Lanka and bearing the exchange rate loss. 

The most recent statement by the Central Bank, the six-month road map, places a bigger weight on the generation of foreign exchange through investments in national assets such as the West Container Terminal, power plants and development projects. That is a positive sign that our underutilised assets are now being looked at for revenue generation. But in terms of the tools that we have used, are they sufficient? Most likely not. However we will have to wait for a few weeks to make an estimation on the effectiveness of these tools and measures. 

On the other hand, investments such as the WCT and other infrastructure development carry a larger import component. Even in tourism about 80% of the revenue consists of imported content. Unfortunately there are no shortcuts for a deepening economic crisis brewing for decades. We are already in a crisis for too long and we are cornering ourselves. The impact for common people would be to sacrifice their quality of life. That is to let go of what they consumed before and give way even to the little convenience we had. 

Solution 

The solution to overcome the problem are economic reforms. We reiterate often on reforms because there is no other solution. They are the only solution. Budget 2022 is a golden opportunity to direct the country towards economic reforms. Merely reading numbers that allocate money on expenditure that we cannot afford, will take us nowhere. 

The policy direction has to be on allowing the markets to operate based on prices instead of excessive regulation or promoting a culture of banning. The price signalling system will optimise the resources allocation. Markets and investments will receive a positive signalling that Sri Lanka is open for change. Only an optimisation of resource allocation and getting our economic fundamentals right can take us out from this crisis. Otherwise, Sri Lanka will remain where it has been in the past into the foreseeable future. Reforms provide the only road out of this crisis! 

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.